<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A2
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-28830
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Navigant Consulting, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 36-4094854
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
615 North Wabash Avenue, Chicago, Illinois 60611
(Address of principal executive offices, including zip code)
(312) 573-5600
(Registrant's telephone number, including area code)
----------------
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
<S> <C>
Common Stock, par value $0.001 per New York Stock Exchange
share Preferred Stock Purchase Rights
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
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<PAGE>
As of March 6, 2000, 41.1 million shares of the Registrants common stock,
par value $.001 per share ("Common Stock"), were outstanding. The aggregate
market value of shares of Common Stock held by non-affiliates, based upon the
closing sale price of the stock on the New York Stock Exchange on March 6,
2000, was approximately $401.0 million.
The Registrant's Annual Meeting of Stockholders is scheduled to be held in
the summer of 2000.
Statements included in this report which are not historical in nature, are
intended to be, and are hereby identified as, "forward-looking statements" for
purposes of the Private Securities Litigation Reform Act of 1995. Such
statements appear in a number of places in this report, including, without
limitation, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations." When used in this report, the words
"anticipate," "believe," "intend," "estimate," and "expect" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. The Company cautions readers that
forward-looking statements, including without limitation, those relating to
the Company's future business prospects, revenues, working capital, liquidity,
and income, are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward
looking statements, due to several important factors herein identified, among
others, and other risks and factors identified from time to time in the
Company's reports filed with the SEC. The Company undertakes no obligation to
publicly update or revise any forward-looking statements to reflect current or
future events or circumstances.
EXPLANATORY NOTE:
The purpose of this amendment is to amend our Annual Report on Form 10-K
for the period ended December 31, 1999, (the "Original Filing") to make
certain changes in response to comments received from the Securities and
Exchange Commission (the "SEC").
This report continues to speak as of the date of the Original Filing and we
have not updated the disclosure in this report to speak to any later date.
While this report primarily relates to the historical period covered, events
may have taken place since the date of the Original Filing that might have
been reflected in this report if they had taken place prior to the Original
Filing. Any items in the Original Filing not expressly changed hereby shall be
as set forth in the Original Filing. All information contained in this
amendment and the Original Filing is subject to updating and supplementing as
provided in the Company's periodic reports filed with the SEC.
2
<PAGE>
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations relates to the Consolidated Financial Statements
included in this annual report on Form 10-K.
Overview
We are a nationwide provider of consulting services to electric and gas
utilities, insurance companies and pharmaceutical companies, as well as other
Fortune 100 companies. We derive substantially all of our revenues from fees
for professional services. Over the last three years, the substantial majority
of our revenues have been generated under standard hourly or daily rates
billed on a time-and-expenses basis. Our clients are typically invoiced on a
monthly basis with revenue recognized as the services are provided.
Our most significant expenses are project personnel costs, which consist of
consultant salaries and benefits, and travel-related direct project expenses.
We typically employ our project personnel on a full-time basis, although we
supplement our project personnel through the use of independent contractors.
We retain contractors for specific client engagements on a task-specific, per
diem basis during the period their expertise or skills are required. We
believe that retaining contractors on a per-engagement basis provides us with
greater flexibility in adjusting project personnel levels in response to
changes in demand for our services.
Acquisitions
As part of our growth strategy, we expect to continue to pursue
complementary acquisitions to expand our geographic reach, expand the breadth
and depth of our service offerings and enhance our consultant base. In
furtherance of this growth strategy, we acquired twenty-four consulting firms
since our initial public offering in October 1996.
During 1997, we acquired five companies: Resource Management International,
Inc. (RMI), Reed Consulting Group, Inc. (Reed), Sterling Consulting Group,
Inc. (Sterling), Reed-Stowe & Co., Inc. (RSC), and L.E. Burgess Consultants,
Inc. (Burgess). These transactions were accounted for as poolings of
interests. The Company's consolidated financial statements have been restated
as if RMI, Reed, Sterling and RSC had been combined for all periods presented.
The stockholders' equity and the operations of Burgess were not significant in
relation to those of the Company. As such, the Company recorded the Burgess
transaction by restating stockholders' equity as of the date of the
acquisition without restating prior period financial statements.
RMI. As of July 31, 1997, we acquired substantially all of the common stock
of RMI in exchange for 3.2 million shares of our common stock (valued at the
time of closing at approximately $75.3 million) and acquired the remaining
minority interest in exchange for cash. RMI, based in Sacramento, California,
is a provider of consulting services to gas, water, and electric utilities,
with operations in the western and eastern United States and international
marketplace. RMI's broad range of engineering, technical and economic
regulatory services complemented our management consulting and information
technology services.
Reed. As of August 15, 1997, we acquired substantially all of the common
stock of Reed in exchange for 0.8 million shares of our common stock (valued
at the time of closing at approximately $17.6 million) and acquired the
remaining minority interest in exchange for cash. Reed, based in the Boston,
Massachusetts area, provides strategic planning, operations management and
economic and regulatory services to electric and natural gas utilities. Reed's
operations expanded our services and client base in the northeast United
States and internationally.
Other 1997 Acquisitions. We acquired all of the common stock of Burgess as
of January 1, 1997, and all of the common stock of Sterling and of RSC as of
December 1, 1997. In the aggregate for these three transactions, we issued 0.7
million shares of our common stock (valued at the time of closing at
approximately $18.5 million). The consulting operations of these three
companies were complementary to our existing businesses and have been
integrated within the operations of other existing or acquired companies.
9
<PAGE>
During 1998, we acquired eight companies: LECG, Inc. (LECG), Peterson
Consulting, LLC (Peterson), Saraswati Systems Corporation (SSC), Applied
Health Outcomes, Inc. (AHO), AUC Management Consultants, Inc. (AUC),
Hydrologic Consultants, Inc. of California (HCI), American Corporate
Resources, Inc. (ACR), and The Vision Trust Marketing Group, LLC (VTM). These
transactions were accounted for as poolings of interests. The Company's
consolidated financial statements have been restated as if LECG, Peterson,
SSC, AHO, AUC, and HCI had been combined for all periods presented. The
stockholders' equity and the operations of ACR and VTM were not significant in
relation to those of the Company. As such, the Company recorded the ACR and
VTM transactions by restating stockholders' equity as of the dates of the
acquisition without restating prior period financial statements.
LECG. As of August 19, 1998, we acquired substantially all of the common
stock of LECG in exchange for 7.3 million shares of our common stock (valued
at the time of closing at approximately $228.9 million) and acquired the
remaining minority interest in exchange for cash. LECG, based in the San
Francisco, California area, is a provider of economic consulting and
litigation support services. LECG's operations further increased our economic
and regulatory expertise and expanded our presence in the telecommunications
industry.
Peterson. As of August 31, 1998, we acquired substantially all of the
common stock of Peterson in exchange for 5.6 million shares of our common
stock (valued at the time of closing at approximately $156.7 million) and
acquired the remaining minority interest in exchange for cash. Peterson, based
in the Chicago area, is a provider of information management services.
Peterson's operations expanded our service offerings in claims management,
litigation support, and information management.
Other 1998 Acquisitions. We acquired all of the common stock of AUC, HCI,
ACR as of April 3, 1998 and all of the common stock of VTM as of June 1, 1998.
We acquired all of the common stock of SSC and AHO as of September 1, 1998. In
the aggregate for these six transactions, we issued 1.2 million shares of our
common stock (valued at the time of closing at approximately $35.3 million).
The consulting operations of all six companies were complementary to our
existing businesses and have been integrated within the operations of other
existing or acquired companies.
1999 Acquisitions. During 1999, the Company completed eleven acquisitions
(collectively, the "1999 Acquisitions"). The 1999 Acquisitions were accounted
for by the purchase method of accounting and, accordingly, the results of
operations have been included in the consolidated financial statements from
the respective dates of acquisition. On February 7, 1999, the Company issued
2.4 million shares of common stock (valued at the time of closing at
approximately $123.7 million) for substantially all of the outstanding common
stock of Strategic Decisions Group and acquired the remaining minority
interest in exchange for cash. On March 31, 1999, the Company completed the
acquisitions of all of the outstanding stock of Triad International, Inc.,
GeoData Solutions, Inc., and Dowling Associates, Inc. in exchange for 1.8
million shares of the Company's common stock (valued at the time of closing at
approximately $57.3 million). On September 30, 1999, the Company completed its
acquisition of the business operations and certain assets of Penta Advisory
Services LLC (Penta) and the stock of Scope International, Inc. (Scope) for a
total cash purchase price of $15.1 million. The purchase agreements for Penta
and Scope also provide for additional payments, payable in cash or Company
common stock, over the next two to five years contingent on future revenue
growth and gross margin targets. The additional payments, if any, will be
accounted for as additional goodwill. On October 1, 1999, the Company
completed the acquisition of the stock of Brooks International AB, Brooks
International Consulting OY, and Brooks International SPRL for an aggregate
cash purchase price of $3.3 million. On November 1, 1999, the Company
completed the acquisition of the stock of The Barrington Consulting Group,
Inc. (Barrington) in exchange for $14.4 million in cash paid at closing and
total deferred cash payments of $7.8 million, payable in two equal annual
installments. The purchase agreement for Barrington also provides for
additional cash payments of up to $7.8 million in the aggregate, which are
contingent on continued employment with the Company of certain Barrington
shareholders and are payable in cash in two annual installments. On December
1, 1999, the Company completed the acquisition of all of the assets of Glaze
Creek Partners, LLC in exchange for $0.8 million in cash. There were no pre-
acquisition intercompany transactions between the Company and the 1999
Acquisitions.
10
<PAGE>
An inability to effectively integrate the acquisitions or any companies
acquired in the future may adversely affect our ability to bid successfully on
engagements and to grow our business. Performance problems or dissatisfied
clients at one company could have an adverse effect on our reputation as a
whole. If our reputation were damaged, for those or other reasons, this could
make it more difficult to market our services or to acquire additional
companies in the future. In addition, acquired companies may not operate
profitably.
Acquisitions also involve a number of additional risks, including, among
others, the following:
--Diversion of management's attention;
--Potential loss of key clients or personnel;
--Risks associated with unanticipated assumed liabilities and problems; and
--Risks of managing businesses or entering markets in which we have limited
or no direct expertise.
We expect to continue to acquire companies as an element of our growth
strategy. Acquisitions involve certain risks that could cause our actual
growth to differ from our expectations. For example
--We may not be able to continue to identify suitable acquisition
candidates or to acquire additional consulting firms on favorable terms.
--We compete with other companies to acquire consulting firms. We cannot
predict whether this competition will increase. If competition does
increase, there may be fewer suitable consulting firms available to be
acquired and the price for suitable acquisitions may increase.
--We may not be able to integrate the operations (accounting and billing
functions, for example) of businesses we acquire to realize the economic,
operational and other benefits we anticipate.
--We may not be able to successfully integrate acquired businesses in a
timely manner or we may incur substantial costs, delays or other
operational or financial problems during the integration process.
--It may be difficult to integrate a business with personnel who have
different business backgrounds and corporate cultures.
Results of Operations
The following table sets forth, for the periods indicated, selected
statement of operations data as a percentage of revenues:
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Revenues................................................ 100.0 % 100.0 % 100.0 %
Cost of services...................................... 66.9 60.6 63.5
----- ----- -----
Gross profit............................................ 33.1 39.4 36.5
General and administrative expenses................... 26.9 21.6 24.3
Amortization expense.................................. 6.1 -- --
Merger-related costs and restructuring charges........ -- 4.4 0.5
Stock option compensation expense..................... 1.0 -- --
----- ----- -----
Operating income........................................ (0.9) 13.4 11.7
Other expense (income), net........................... 0.6 (0.9) (0.5)
----- ----- -----
Income before income tax expense........................ (1.5) 14.3 12.2
Income tax expense.................................... 2.2 8.9 4.0
----- ----- -----
Net income (loss)....................................... (3.7)% 5.4 % 8.2 %
===== ===== =====
</TABLE>
11
<PAGE>
1999 Compared to 1998
Revenues. Revenues increased $110.1 million, or 38%, to $397.7 million in
the year ended December 31, 1999 from $287.6 million in 1998. The growth in
revenue was primarily due to acquisitions, expansion of services provided to
existing clients, engagements with new clients, and increased selling and
business development efforts. During 1999, the Company made acquisitions
consistent with its strategy of acquiring consulting companies that provide
complementary services or broaden the Company's geographic presence. The 1999
Acquisitions had pre-acquisition revenues for 1999 and 1998 of $39.4 million
and $115.0 million, respectively, which were not included in the Company's
consolidated results of operations. Pro forma revenues, adjusted for the
effect of the 1999 acquisitions, increased $34.4 million, or 9%, to $437.1
million in the year ended December 31, 1999 from $402.7 million in 1998.
The Company's consolidated 1998 revenues included certain operations which
were not reflected in 1999. The 1998 reported and pro forma revenues include
revenues of $5.3 million related to certain principals who departed from
Peterson in July 1998 and $3.4 million of revenues related to Insurance Data
Resources, Inc., a subsidiary of Peterson, which was disposed of on September
1, 1998. Excluding the effects of the departed principals and the disposed
operations, the revenue increase in 1999 would have been $43.1 million, or
11%, to $437.1 million from $394.0 million in the prior year. Consulting
engagements with new clients and an increase in the average size of client
consulting engagements contributed $34.6 million and $8.5 million,
respectively, of the $43.1 million of organic revenue growth in 1999.
Gross Profit. Gross profit consists of revenues less cost of services,
which includes consultant compensation and benefits and direct project-related
expenses. Gross profit increased $18.1 million, or 16%, to $131.6 million in
1999 from $113.5 million in 1998. Higher 1999 revenues would have resulted in
a $43.4 million increase in gross profit had 1999 gross profit margins as a
percentage of revenue been consistent with those in 1998. However, the gross
margin in 1999 declined to 33.1% of revenue from 39.4% in 1998. The decline in
gross margin in 1999 was primarily due to higher consultant compensation of
$23.1 million.
General and Administrative Expenses. General and administrative expenses
include facilities costs, salaries and benefits of management and support
personnel, allowances for uncollectible accounts receivable, depreciation
expense, outside professional fees, and all other corporate support costs.
General and administrative expenses for 1999 increased $45.2 million to $107.3
million from $62.1 million in 1998. The $45.2 million increase in general and
administrative expenses in 1999 is comprised of: $10.6 million in facilities
costs, $2.3 million in personnel related expenses, $12.8 million in allowances
for uncollectible accounts receivable, $8.8 million in depreciation expense,
$7.1 million in professional fees, and $3.6 million in other corporate support
costs. In total, general and administrative expenses as a percentage of
revenue increased to 27.0% in 1999 from 21.6% in 1998. This higher level of
expenses as a percentage of revenue in 1999 represents approximately $21.4
million of growth in expenses in excess of the rate of growth in revenues. The
incremental $21.4 million of general and administrative expenses is the result
of $0.9 million in higher facilities costs, $11.8 million in higher allowances
for uncollectible accounts receivable established in the fourth quarter of
1999, $6.3 million in higher depreciation expense principally from impairments
of certain fixed assets, $5.7 million in higher professional fees primarily
related to litigation, partially offset by $3.3 million in lower personnel
related expenses.
Amortization Expense. The excess of cost over the net assets acquired for
the 1999 Acquisitions of approximately $226.4 million has been recorded as
intangible assets, including goodwill, and is being amortized on a straight-
line basis over 7 years. The $24.3 million non-cash expense recorded in 1999
represents the pro rata amortization from the respective acquisition dates
through December 31, 1999. Amortization would have been approximately $32.4
million had the 1999 Acquisitions occurred as of January 1, 1999.
Merger Related Cost and Restructuring Charges (Benefit). In the third
quarter of 1998, the Company incurred merger-related costs of $12.8 million
related to the acquisitions of LECG and Peterson, which were accounted for as
poolings of interests. These costs included legal, accounting and other
transaction related fees
12
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and expenses, as well as accruals to consolidate certain facilities. The
Company has reviewed the merger-related accruals and determined that certain
amounts previously accrued are no longer necessary given subsequent
acquisition activity and changes in the Company's organizational structure.
The results of operations for the year ended December 31, 1999 reflect a
benefit of $1.4 million for the reversal of the previously accrued amounts.
The Company recognized $1.2 million of expense in 1999 for employee
separations associated with consolidation of certain accounting and human
resources functions. In July 1999, the Company announced a restructuring
initiative and offered involuntary severance packages to 73 employees in the
administrative, accounting and human resources functions.
Stock Option Compensation Expense. The Company recorded $3.5 million for
stock option compensation expense in 1999 attributable to 0.3 million option
grants to a total of sixteen individuals which were issued at prices below
fair market value. The amount charged to expense was calculated using the
intrinsic value method for employees and the Black-Scholes option pricing
model for non-employees and approximates the aggregate dollar amount by which
the grant prices of the options differ from the market prices as of the dates
for which the Company has independent evidence to support the issuance of the
options. The Company recorded an additional $0.4 million of stock option
compensation expense to amortize the value of certain options retained by a
former employee upon separation from the Company.
Other Income (Expense), Net. Other income (expense), net includes interest
expense, interest income and other non-operating income and expenses. For
1999, the Company incurred a net non-operating expense of $2.2 million, which
represented $4.8 million of net incremental expense from the $2.6 million
other income realized in 1998. The incremental expense was principally the
result of a $5.3 million charge to earnings in 1999 to reflect the likely
impairment in the value of certain loans receivable from shareholders. This
incremental expense was partially offset by higher interest income in 1999.
Income Tax Expense. Income tax expense decreased $16.8 million to $8.8
million for 1999 from $25.6 million in 1998. The Company's results of
operations in 1999 included $24.3 million of non-cash, non-deductible
amortization expenses resulting from the 1999 acquisitions and $3.9 million of
non-cash, non-deductible stock options compensation expense. Excluding the
effect of these non-deductible items, the effective tax rate for 1999 would
have been 39.5%. The Company's effective income tax rate for 1998 would have
been 39.8% excluding the effect of the one-time, non-cash charge to income tax
expense of $7.2 million related to the conversion of Peterson from the
modified cash basis to the accrual basis of accounting for tax purposes and
the effect of certain merger-related costs resulting from the mergers
completed during the third quarter of 1998 that are not tax deductible.
Net Income (Loss). The Company's 1999 net loss of $14.6 million represents
a $30.2 million decline from the 1998 net income of $15.6 million. Higher 1999
revenues resulted in a $18.1 million increase in gross profits over the prior
year, which was more than offset by increases of $45.2 million in general and
administrative expense, $24.3 million in amortization expenses, $3.9 million
in stock option compensation expense and $4.8 million of other non-operating
expenses. These expense increases were partially offset by $16.8 million in
lower income tax expenses and $13.0 million in lower merger-related costs.
1998 Compared to 1997
Revenues. Revenues increased $58.9 million, or 26%, to $287.6 million in
1998 from $228.7 million in 1997 due to continued strong demand for management
consulting services, and increased selling and business development efforts.
Selling and business development efforts in support of the Company's strategy
to expand the client base and leverage existing client relationships resulted
in $57.2 million of the incremental $58.9 million 1998 revenues. Engagements
with new clients and an increase in the average size of client engagements
contributed $40.4 million and $16.8 million of that total, respectively.
Gross Profit. Gross profit increased $29.9 million, or 36%, to $113.5
million in 1998 from $83.6 million in 1997. Higher 1998 revenues contributed
$21.5 million of the increase in gross profit. The remaining $8.4 million
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of the increase in gross profit reflects an increase in gross profit as a
percentage of revenues to 39.4% in 1998 from 36.5% in 1997. The increase in
the 1998 gross profit margin was the result of increased utilization of the
Company's professional consultants coupled with higher average billing rates
and a lower proportion of non-margin billable expenses to fee revenues.
General and Administrative Expenses. General and administrative expenses
for the year ended December 31, 1998 increased $6.5 million, or 12%, to $62.1
million, which represented 21.6% of revenues, compared to $55.6 million, or
24.3% of revenues, in the comparable 1997 period. The increase in general and
administrative costs was primarily due to a $3.3 million increase in
facilities expenses, a $1.8 million increase in administrative salaries, and a
$1.3 million increase in incentive compensation. However, these expenses
increased at a slower rate than the Company's revenues and overall volume of
business, resulting in a 2.7% decrease in general and administrative expenses
as a percent of revenue. This improvement is attributable to increased
efficiencies in certain support functions (i.e., human resources, benefits
administration and accounting), improved economies of scale and the closing of
certain duplicate facilities at the beginning of 1998.
Merger-Related Cost and Restructuring Charges. Merger-related costs
increased $11.5 million to $12.8 million in 1998 from $1.3 million in 1997.
During 1998, the Company incurred merger-related costs of $12.8 million
related to the acquisitions of LECG and Peterson, which were accounted for as
poolings of interests. These costs include legal, accounting and other merger-
related fees and expenses, as well as accruals to consolidate certain
facilities. In the prior year period, the Company incurred legal, accounting
and other merger-related fees and expenses of $1.3 million related to the
acquisitions of RMI and Reed, which were accounted for as poolings of
interests. The increased direct merger-related costs in 1998 were the result
of the greater size and complexity of the 1998 transactions.
Other Income, Net. For the fiscal year ended December 31, 1998, other
income, net increased $1.4 million to $2.6 million from $1.2 million for 1997.
This increase was largely the result of higher interest income due to larger
average cash balances outstanding during the period. The larger average cash
balance in 1998 was largely the result of $86.4 million in net proceeds from
two offerings of the Company's common stock supplemented by $21.2 million of
operating cash flows and $10.6 million of cash inflow primarily from employee
stock option exercises. These sources of cash were partially offset by $13.6
million of capital spending, $18.9 million of cash used to acquire certain
minority interests in business combinations, $8.2 million of payments to
retire pre-existing short-term debt of acquired companies, and $6.1 million in
payments of pre-acquisition undistributed earnings of purchased companies.
Income Tax Expense. Income tax expense increased $16.4 million to $25.6
million in 1998 from $9.2 million in 1997. The Company's effective income tax
rate was 62.2% for the year ended December 31, 1998. The effective rate for
this period would have been 39.8%, excluding the effect of the one-time, non-
cash charge to income tax expense of $7.2 million related to the conversion of
Peterson from the modified cash basis to the accrual basis of accounting for
tax purposes and the effect of certain merger-related expenses resulting from
the acquisitions of LECG and Peterson that are not tax deductible. The
Company's effective income tax rate was 33.1% for the year ended December 31,
1997. The effective rate would have been 38.2%, including federal and certain
state income taxes that would have been required had all the Company's
subsidiaries been taxable entities during this period.
Net Income. Net Income decreased approximately $3.1 million to $15.6
million in 1998 from $18.7 million in 1997. Higher 1998 revenues resulted in a
$29.9 million increase in gross profits over the prior year. However, the
higher level of 1998 gross profits was offset by a $6.5 million increase in
general and administrative expenses, a $11.5 million increase in merger-
related costs, and a $16.4 million increase in income tax expense. An increase
in other income in 1998 of $1.4 million accounted for the remainder of the
change in net income between the periods.
14
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Unaudited Quarterly Results
The following table sets forth certain unaudited quarterly operating
information. These data have been prepared on the same basis as the audited
financial statements contained elsewhere in this Form 10-K and include all
normal recurring adjustments necessary for the fair presentation of the
information for the periods presented, when read in conjunction with the
Company's Consolidated Financial Statements and related Notes thereto. Results
for any previous fiscal quarter are not necessarily indicative of results for
the full year or for any future quarter.
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $66,134 $70,231 $73,967 $77,294 $84,388 $104,732 $107,452 $101,123
Cost of services........ 41,254 42,254 44,302 46,364 50,418 59,118 61,735 94,809
------- ------- ------- ------- ------- -------- -------- --------
Gross profit............ 24,880 27,977 29,665 30,930 33,970 45,614 45,717 6,314
General and
administrative
expenses............... 16,355 18,232 13,552 13,955 15,343 20,964 21,077 49,890
Amortization expense.... -- -- -- -- 2,800 6,830 6,830 7,840
Merger-related costs and
restructuring charges.. -- -- 12,778 -- -- -- (206) --
Stock option
compensation expense... -- -- -- -- 1,698 532 1,063 557
------- ------- ------- ------- ------- -------- -------- --------
Operating income (loss). 8,525 9,745 3,335 16,975 14,129 17,288 16,953 (51,973)
Other (income) expense,
net.................... (550) (791) (523) (773) (1,115) (1,037) (1,218) 5,561
------- ------- ------- ------- ------- -------- -------- --------
Income (loss) before
income tax expense..... 9,075 10,536 3,858 17,748 15,244 18,325 18,171 (57,534)
Income tax expense
(benefit).............. 3,773 4,215 10,680 6,968 8,020 10,186 10,310 (19,689)
------- ------- ------- ------- ------- -------- -------- --------
Net income (loss)....... $ 5,302 $ 6,321 $(6,822) $10,780 $ 7,224 $ 8,139 $ 7,861 $(37,845)
======= ======= ======= ======= ======= ======== ======== ========
Net income (loss), per
diluted share.......... $ 0.15 $ 0.17 $ (0.19) $ 0.28 $ 0.17 $ 0.19 $ 0.17 $ (0.91)
======= ======= ======= ======= ======= ======== ======== ========
Diluted shares.......... 36,477 37,752 36,610 39,093 41,786 43,508 45,357 41,798
======= ======= ======= ======= ======= ======== ======== ========
</TABLE>
Revenues and operating results fluctuate from quarter to quarter as a
result of a number of factors, including the significance of client
engagements commenced and completed during a quarter, the number of business
days in a quarter and employee hiring and utilization rates. The timing of
revenues varies from quarter to quarter due to factors such as the Company's
sales cycle, the ability of clients to terminate engagements without penalty,
the size and scope of assignments and general economic conditions. Because a
significant percentage of the Company's expenses are relatively fixed, a
variation in the number of client assignments or the timing of the initiation
or the completion of client assignments can cause significant variations in
operating results from quarter to quarter. Furthermore, the Company has on
occasion experienced a seasonal pattern in its operating results, with a
smaller proportion of the Company's revenues and lower operating income
occurring in the fourth quarter of the year or a smaller sequential growth
rate than in other quarters.
During the quarter ended December 31, 1999, the Company incurred certain
pre-tax expenses which varied significantly from expense levels recorded in
prior interim periods during the year. The aggregate of these expenses
amounted to $62.6 million and consisted of the following: $28.5 million of
additional costs of sales, $28.2 million of incremental general and
administrative expenses, and $5.9 million of other incremental non-operating
expenses. The higher fourth quarter cost of sales was principally due to $26.3
million of incremental compensation expense accruals to provide for
competitive levels of incentive compensation and promote employee retention.
Fourth quarter general and administrative expenses included the following
significant incremental expenses: $12.8 million of allowances for
uncollectible accounts receivable; $5.5 million of write-downs of certain
fixed assets, $5.5 million of professional fees and other costs related to
settlement of certain then outstanding litigation; $1.2 million of
compensation expense to provide for competitive levels of incentive
compensation and promote employee retention; and $0.5 million of stock option
compensation expense. The increase in non-operating expenses for the fourth
quarter was primarily the result of a loss contingency accrued at December 31,
1999 in the amount of $5.3 million, related to the impairment of notes
receivable from certain former company officers.
15
<PAGE>
The following table sets forth select unaudited quarterly information as
previously reported and as amended. The amended amounts have been restated to
retroactively reflect the results of operations for certain business
combinations completed in 1998 which were accounted for as poolings of
interests. At the respective dates of acquisition, the Company had determined
that the stockholders' equity and the results of operations of these
businesses were not material, individually or in the aggregate, in relation to
those of the Company. As such, the Company had recorded these combinations by
restating stockholders' equity as of the effective date of each acquisition
without restating prior period financial statements. However, based in part on
comments received from the Securities and Exchange Commission, the Company has
restated the financial statements for 1998 to reflect the results of
operations of AUC, HCI, SSC, and AHO.
The amended amounts also incorporate certain reclassifications to conform
the presentation of revenue and cost of sales for 1998 and previously issued
interim 1999 periods to the 1999 presentation. Certain billable expenses which
had previously been presented net of related revenues have been reclassified.
The amended amounts for the first three quarters of 1999 also reflect
adjustments to correct the application of certain accounting principles
related to stock option compensation expense. See also Note 13, "Long-Term
Incentive Plan".
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept.
1998 1998 1998 1998 1999 1999 30, 1999
-------- -------- --------- -------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue as
previously reported.... $60,809 $64,863 $68,311 $72,894 $82,151 $103,623 $106,185
Retroactive effect of
pooling accounting..... 2,854 2,269 1,721 -- -- -- --
Reclassifications....... 2,471 3,099 3,935 4,400 2,237 1,109 1,267
------- ------- ------- ------- ------- -------- --------
Revenues, as amended.... $66,134 $70,231 $73,967 $77,294 $84,388 $104,732 $107,452
======= ======= ======= ======= ======= ======== ========
Gross profit, as
previously reported.... $24,786 $27,848 $28,991 $30,930
Retroactive effect of
pooling accounting..... 94 129 673 --
------- ------- ------- -------
Gross profit, as
amended................ $24,880 $27,977 $29,664 $30,930
======= ======= ======= =======
Operating income, as
previously reported.... $ 8,899 $10,101 $ 2,909 $16,975 $15,827 $ 17,820 $ 18,016
Retroactive effect of
pooling accounting..... (374) (356) 426 -- -- -- --
Stock option
compensation expense... -- -- -- -- (1,698) (532) (1,063)
------- ------- ------- ------- ------- -------- --------
Operating income (loss),
as amended $ 8,525 $ 9,745 $ 3,335 $16,975 $14,129 $ 17,288 $ 16,953
======= ======= ======= ======= ======= ======== ========
Net income (loss) as
previously reported.... $ 5,658 $ 6,658 (6,973) $10,780 $ 8,922 $ 8,671 $ 8,924
Retroactive effect of
pooling accounting..... (356) (337) 151 -- -- -- --
Stock option
compensation expense... -- -- -- -- (1,698) (532) (1,063)
------- ------- ------- ------- ------- -------- --------
Net income (loss), as
amended................ $ 5,302 $ 6,321 $(6,822) $10,780 $ 7,224 $ 8,139 $ 7,861
======= ======= ======= ======= ======= ======== ========
Net income (loss) per
share as previously
reported............... $ 0.16 $ 0.18 $ (0.19) $ 0.28 $ 0.21 $ 0.20 $ 0.20
Retroactive effect of
pooling accounting..... (0.01) (0.01) -- -- -- -- --
Stock option
compensation expense... -- -- -- -- (0.04) (0.01) (0.03)
------- ------- ------- ------- ------- -------- --------
Net income (loss) per
diluted share, as
amended................ $ 0.15 $ 0.17 $ (0.19) $ 0.28 $ 0.17 $ 0.19 $ 0.17
======= ======= ======= ======= ======= ======== ========
Diluted shares, as
previously reported.... 35,566 37,031 36,129
Retroactive effect of
pooling accounting..... 911 721 481
======= ======= =======
Diluted shares, as
amended................ 36,477 37,752 36,610
======= ======= =======
</TABLE>
Liquidity and Capital Resources
Net cash provided by operating activities was $17.4 million for the year
ended December 31, 1999. During the year, the primary sources of cash provided
by operating activities was net income adjusted for non-cash charges of
depreciation, amortization, stockholder notes impairment provision and stock
compensation expense. Net income adjusted for these non-cash charges was $32.5
million. Operating cash flow was also positively affected by increases in
accrued compensation and project costs of $10.6 million and other current
liabilities of
16
<PAGE>
$3.4 million. Operating cash flow was negatively affected by the increase in
accounts receivable of $19.5 million, the decrease in income taxes payable of
$13.0 million and the non-cash charge relating to deferred income taxes of
$11.0 million.
The Company used $18.6 million for capital spending to support growth in
personnel and services. These investments included leasehold improvements,
furniture and equipment for new leased facilities, additional computer and
related equipment for information management consulting services and the
purchase and implementation of enterprise financial and project software
system. The Company used $42.1 million in cash during 1999 in conjunction with
the 1999 Acquisitions.
Net cash used in financing activities was $32.5 million in 1999. During the
year, the Company received net cash and related tax benefits of $17.4 million
from transactions related to stock option exercises and employee stock
purchases. In addition, the Company received proceeds of $10.0 million from
borrowings on the line of credit facility. The Company used $40.0 million to
purchase treasury shares in 1999. Borrowing by stockholders used approximately
$17.0 million of funds during the year.
As of December 31, 1999, the Company had no significant commitments for
capital expenditures, except for those related to rental expense under
operating leases and related leasehold improvements. The total amount of
operating lease payments in 2000 is expected to be approximately $15.2
million. The total amount of capital spending in the year 2000 related to
leasehold improvements is expected to be approximately $6.9 million.
The Company had approximately $42.3 million in cash and cash equivalents at
December 31, 1999, resulting principally from cash flows from operations and
the various public stock offerings during the previous three years. The
company believes that the current cash and cash equivalents, the future cash
flows from operations and the $50 million line of credit facility will provide
adequate cash to fund anticipated short-term and long-term cash needs from
normal operations. In the event the Company were to make significant cash
expenditures in the future for major acquisitions or other non-operating
activities, the Company would seek additional debt or equity financing, as
appropriate. The Company had no plans or intentions for such expenditures as
of December 31, 1999.
Recently Issued Financial Accounting Standards
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities in June 1998. This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities, It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for fiscal years
beginning after June 15, 1999. The Company does not currently have any
derivative instruments or complete any hedging activities. The adoption of
this standard is not expected to be significant.
Item 8. Consolidated Financial Statements and Supplemental Data
The Consolidated Financial Statements of the Company are annexed to the
report as pages F-1 through F-22. An index to such materials appears on page
F-1.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Navigant Consulting, Inc.
/s/ James F. Hillman
By: _________________________________
James F. Hillman
Chief Financial Officer
Date: May 4, 2000
19
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
Audited Consolidated Financial Statements as of December 31, 1999 and 1998,
and for each of the three years in the period ended December 31, 1999
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Stockholders' Equity........................... F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Navigant Consulting, Inc.:
We have audited the accompanying consolidated balance sheets of Navigant
Consulting, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
results of operations, stockholders' equity, and cash flows for the year ended
December 31, 1997 related to companies acquired that were accounted for under
the pooling of interests method, which statements reflect total revenues and
net income constituting 69 percent and 61 percent, respectively, of the
related restated consolidated totals. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as
it relates to the amounts included for companies acquired that were accounted
for under the pooling of interests method, is based solely on the reports of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the
other auditors provide a reasonable basis for our opinion.
The 1998 and 1997 consolidated financial statements have been restated as
discussed in note 3 to the consolidated financial statements.
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Navigant Consulting, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Chicago, Illinois
March 28, 2000
F-2
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 42,345 $119,704
Accounts receivable, net................................. 116,100 80,163
Prepaid and other current assets......................... 7,364 6,979
Income tax receivable.................................... 8,211 --
Deferred income taxes.................................... 2,385 --
-------- --------
Total current assets................................... 176,405 206,846
Property and equipment, net................................ 33,763 22,197
Intangible assets, net..................................... 202,096 --
Other assets............................................... 2,412 1,474
-------- --------
Total assets........................................... $414,676 $230,517
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Short-term debt.......................................... $ 10,000 $ --
Accounts payable and accrued liabilities................. 20,709 17,955
Accrued compensation and project costs................... 58,425 28,142
Income taxes payable..................................... -- 2,942
Deferred income taxes.................................... -- 2,171
Other current liabilities................................ 19,673 9,127
-------- --------
Total current liabilities.............................. 108,807 60,337
Deferred income taxes...................................... 725 5,276
Other non-current liabilities.............................. 4,475 --
-------- --------
Total liabilities...................................... 114,007 65,613
-------- --------
Stockholders' equity:
Preferred stock, $.001 par value; 3,000 shares
authorized; no shares issued or outstanding............. -- --
Common stock, $.001 par value; 75,000 shares authorized;
43,129 and 38,004 shares issued and outstanding in 1999
and 1998, respectively.................................. 43 38
Additional paid-in capital............................... 340,528 134,624
Treasury stock 2,086 shares at December 31, 1999......... (52,811) --
Notes receivable from stockholders....................... (2,583) --
Accumulated other comprehensive income................... (158) (30)
Retained earnings........................................ 15,650 30,272
-------- --------
Total stockholders' equity............................. 300,669 164,904
-------- --------
Total liabilities and stockholders' equity............. $414,676 $230,517
======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-3
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues......................................... $397,694 $287,626 $228,731
Cost of services................................. 266,080 174,175 145,144
-------- -------- --------
Gross profit................................... 131,614 113,451 83,587
General and administrative expenses.............. 107,274 62,093 55,579
Amortization..................................... 24,300 -- --
Merger related cost and restructuring charges
(benefit)....................................... (206) 12,778 1,312
Stock option compensation expense................ 3,850 -- --
-------- -------- --------
Operating income (loss)........................ (3,604) 38,580 26,696
-------- -------- --------
Other expense (income):
Interest income................................ (3,857) (3,063) (1,184)
Interest expense............................... 376 688 446
Other, net..................................... 5,672 (263) (467)
-------- -------- --------
Total other expense (income)................. 2,191 (2,638) (1,205)
-------- -------- --------
Income (loss) before income tax expense.......... (5,795) 41,218 27,901
Income tax expense............................. 8,827 25,637 9,237
-------- -------- --------
Net Income (loss)................................ $(14,622) $ 15,581 $ 18,664
======== ======== ========
Earnings (loss) per share:
Basic.......................................... $ (0.35) $ 0.43 $ 0.56
Diluted........................................ $ (0.35) $ 0.41 $ 0.55
Weighted average shares outstanding:
Basic.......................................... 41,601 36,476 33,289
Diluted........................................ 41,601 37,707 33,798
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-4
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Preferred Notes Accumulated
Stock Common Stock Additional Receivable Other Treasury Stock Total
------------- -------------- Paid-In From Comprehensive Retained ---------------- Stockholders'
Shares Amount Shares Amount Capital Stockholders Income Earnings Shares Amount Equity
------ ------ ------ ------ ---------- ------------ ------------- -------- ------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............ -- -- 33,446 $34 $ 41,313 $ (3,045) $ 6 $12,378 -- $ -- $ 50,686
Comprehensive
income.......... -- -- -- -- -- -- (63) 18,664 -- -- 18,601
Issuance of
common stock.... -- -- 2,043 2 25,412 (87) -- 780 -- -- 26,107
Purchase of
common stock.... -- -- (535) (1) (10,340) 44 -- (228) -- -- (10,525)
Distributions... -- -- -- -- -- (351) -- (16,182) -- -- (16,533)
Interest on
notes receivable
from
stockholders.... -- -- -- -- 195 (195) -- -- -- -- --
Collection of
notes receivable
from
stockholders.... -- -- -- -- -- 879 -- -- -- -- 879
--- --- ------ --- -------- -------- ----- ------- ------ -------- --------
Balance at
December 31,
1997............ -- -- 34,954 35 56,580 (2,755) (57) 15,412 -- -- 69,215
Comprehensive
income.......... -- -- -- -- -- -- 27 15,581 -- -- 15,608
Issuance of
common stock.... -- -- 3,645 4 96,965 -- -- -- -- -- 96,969
Purchase of
common stock.... -- -- (595) (1) (18,921) -- -- -- -- -- (18,922)
Distributions... -- -- -- -- -- -- -- (721) -- -- (721)
Collection of
notes receivable
from
stockholders.... -- -- -- -- -- 2,755 -- -- -- -- 2,755
--- --- ------ --- -------- -------- ----- ------- ------ -------- --------
Balance at
December 31,
1998............ -- -- 38,004 38 134,624 -- (30) 30,272 -- -- 164,904
Comprehensive
income (loss)... -- -- -- -- -- -- (128) (14,622) -- -- (14,750)
Issuance of
common stock.... -- -- 5,387 5 215,160 -- -- -- -- -- 215,165
Purchase of
common stock.... -- -- (263) -- (13,335) -- -- -- (2,086) (52,811) (66,146)
Stock option
compensation
expense......... -- -- -- -- 3,850 -- -- -- -- -- 3,850
Issuance of
notes receivable
from
stockholders.... -- -- -- -- -- (20,550) -- -- -- -- (20,550)
Interest on
notes receivable
from
stockholders.... -- -- -- -- 229 (229) -- -- -- -- --
Collection of
notes receivable
from
stockholders.... -- -- -- -- -- 12,929 -- -- 12,929
Impairment of
notes receivable
from
stockholders.... -- -- -- -- -- 5,267 -- -- -- -- 5,267
--- --- ------ --- -------- -------- ----- ------- ------ -------- --------
Balance at
December 31,
1999............ -- -- 43,129 $43 $340,528 $ (2,583) $(158) $15,650 (2,086) $(52,811) $300,669
=== === ====== === ======== ======== ===== ======= ====== ======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-5
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................ $ (14,622) $ 15,581 $ 18,664
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 13,460 4,876 3,337
Amortization........................... 24,300 -- --
Impairment of stockholder notes........ 5,267 -- --
Stock option compensation expense...... 3,850 -- --
Provision for bad debts................ 14,900 1,094 172
Deferred income taxes.................. (10,970) 1,777 2,499
Other non-cash items, net.............. 404 (107) (728)
Changes in assets and liabilities, net
of acquisitions:
Accounts receivable.................. (19,543) (20,917) (12,339)
Prepaid expenses and other current
assets.............................. 1,478 (3,467) (1,292)
Accounts payable and accrued
liabilities......................... (2,069) 7,291 2,099
Accrued compensation and project
costs............................... 10,591 11,029 134
Income taxes payable................. (13,023) (858) 2,923
Other current liabilities............ 3,426 4,907 1,353
---------- ---------- ----------
Net cash provided by operating
activities........................ 17,449 21,206 16,822
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment....... (18,641) (13,340) (7,871)
Acquisition of businesses, net of cash
acquired................................ (42,055) -- --
Other, net............................... (1,582) (296) 54
---------- ---------- ----------
Net cash used in investing
activities........................ (62,278) (13,636) (7,817)
---------- ---------- ----------
Cash flows from financing activities:
Issuance of common stock................. 17,387 96,969 26,107
Purchase of common stock................. (40,011) (18,922) (10,525)
Repayment of long-term debt.............. (322) (319) (1,550)
Proceeds from long-term debt............. -- -- 3,300
Net repayments of short-term debt........ (2,584) (8,242) (3,007)
Proceeds from short-term debt............ 10,000 -- --
Issuance of notes receivable from
stockholders............................ (17,000) -- --
Payments of pre-acquisition undistributed
income to former stockholders........... -- (6,079) (10,121)
Other, net............................... -- 2,755 (1,096)
---------- ---------- ----------
Net cash (used in) provided by
financing activities.............. (32,530) 66,162 3,108
---------- ---------- ----------
Net (decrease) increase in cash and cash
equivalents............................... (77,359) 73,732 12,113
Cash and cash equivalents at beginning of
year...................................... 119,704 45,972 33,859
---------- ---------- ----------
Cash and cash equivalents at end of year... $ 42,345 $ 119,704 $ 45,972
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Navigant Consulting, Inc. (the "Company") is a provider of consulting
services to electric and gas utilities, insurance companies, and
pharmaceutical companies, as well as other Fortune 100 companies. The
Company's services include: management consulting, strategic consulting,
financial and claims services, and economics and policy consulting. The
Company is headquartered in Chicago, Illinois and has regional offices in
various cities within the United States, and several international offices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents are comprised of highly liquid instruments with original
maturities of 90 days or less. The carrying amount of these financial
instruments approximates fair value because of the short maturities.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method based on the estimated useful lives, ranging from
three to forty years, of the various classes of property and equipment.
Amortization of leasehold improvements is computed over the shorter of the
lease term or the estimated useful life of the asset.
Intangible Assets
Intangible assets consist of identifiable intangibles and goodwill.
Identifiable intangibles include customer lists, workforce in place, knowledge
capital, and non-compete agreements. Intangible assets, including goodwill,
are being amortized on the straight-line method over 7 years.
Fair Value of Financial Instruments
The Company considers the recorded value of its financial assets and
liabilities, which consist primarily of cash and cash equivalents, accounts
receivable and accounts payable, to approximate the fair value of the
respective assets and liabilities at December 31, 1999 and 1998.
Revenue Recognition
The Company recognizes revenues as the related services are provided.
Certain contracts are accounted for on the percentage of completion method
whereby revenues are recognized based upon costs incurred in relation to total
estimated costs at completion. Provision is made for the entire amount of
estimated losses, if any, at the time when they are known.
F-7
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Based Compensation
The Company utilizes the intrinsic value-based method of accounting for its
stock-based compensation arrangements with employees. The Company utilizes the
fair value method of accounting for its stock-based compensation arrangements
with non-employee consultants, advisors, and independent contractors.
Income Taxes
Income taxes are accounted for in accordance with the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Prior to December 18, 1997, one of the Company's subsidiaries, LECG, Inc.
(LECG), had elected to be taxed under Subchapter S of the Internal Revenue
Code for income tax purposes. During such period, federal income taxes were
the responsibility of LECG's stockholders as were certain state income taxes.
Therefore, the financial statements do not include a provision for federal
(and some state) income taxes prior to LECG's initial public offering on
December 18, 1997. LECG's S-corporation status terminated on December 18,
1997, thereby subjecting LECG's income to federal and certain other state
income taxes at the corporate level. Accordingly, LECG applied the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," for the period ended December 31, 1997. In addition, LECG
converted from a cash basis to accrual basis for tax purposes in conjunction
with its conversion to a C-corporation. Due to temporary differences in
recognition of revenue and expenses, income for financial reporting purposes
exceeded income for income tax purposes. The conversion to accrual basis along
with these temporary differences resulted in the recognition of a net deferred
tax liability (and a corresponding one-time charge to expense) of $2.7 million
as of December 31, 1997.
Prior to August 14, 1998, another of the Company's subsidiaries, Peterson
Consulting, L.L.C. d/b/a Peterson Worldwide LLC (Peterson) was a limited
liability company, which, for income tax purposes, was treated as a
partnership. Accordingly, the income of Peterson was reported on the
individual income tax returns of its members and federal income taxes, as well
as certain state income taxes, were the responsibility of its members.
Subsequent to August 14, 1998, and based on events unrelated to its
acquisition by the Company, Peterson elected C-corporation status, thereby
subjecting its income to federal and certain state income taxes at the
corporate level. As a result of its acquisition of Peterson, the Company has
applied the provisions of SFAS No. 109, and has converted Peterson from the
modified cash basis to the accrual basis for tax purposes. Due to temporary
differences in recognition of revenue and expense, income for financial
reporting purposes has exceeded income for tax reporting purposes. The
conversion to accrual basis, along with these temporary differences, resulted
in the recognition of a one-time, non-cash charge of $7.2 million to be
recorded during the period in which the merger occurred.
F-8
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
The following table set forth the components of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1999 1998 1997
--------- -------- --------
(amounts in thousands)
<S> <C> <C> <C>
Numerator:
Net income (loss)............................ $(14,622) $15,581 $18,664
========= ======== ========
Denominator:
Weighted average shares outstanding.......... 41,601 36,476 33,289
Effect of dilutive securities:
Employee stock options....................... -- 1,231 509
--------- -------- --------
Denominator for diluted earnings per share..... 41,601 37,707 33,798
========= ======== ========
</TABLE>
For the year ended December 31, 1999, the weighted-average effect of
employee stock options was 1.68 million shares. However, the Company incurred
a loss for the period and the effect of these options was anti-dilutive.
Foreign Currency Translation
The balance sheets of the Company's foreign subsidiaries are translated
into U.S. dollars using the year-end exchange rate, and sales and expenses are
translated using the average exchange rate for the year. The resulting
translation gains or losses are recorded as a separate component of
stockholders' equity as other comprehensive income.
3. RECONCILIATION TO PREVIOUSLY REPORTED AMOUNTS
The following table sets forth select operating information as previously
reported and as amended. The amended amounts have been restated to
retroactively reflect the results of operations for certain business
combinations completed in 1998 and 1997 which were accounted for as poolings
of interests. At the respective dates of acquisition, the Company had
determined that the stockholders' equity and the results of operations of
these businesses were not material, individually or in the aggregate, in
relation to those of the Company. As such, the Company had recorded these
combinations by restating stockholders' equity as of the effective date of
each acquisition without restating prior period financial statements. The
Company has restated the financial statements for 1998 and 1997 to reflect the
results of operations of Sterling Consulting Group, Inc., Reed-Stowe & Co.,
Inc., AUC Management Consultants, Inc., Hydrologic Consultants, Inc. of
California, Saraswati Systems Corporation and Applied Health Outcomes, Inc.
F-9
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amended amounts also incorporate certain reclassifications to conform
the presentation of revenue and cost of sales for 1998 and 1997 to the 1999
presentation. Certain billable expenses which had previously been presented
net of related revenues have been reclassified.
<TABLE>
<CAPTION>
Years ended
December 31,
--------------------------
1998 1997
------------ ------------
(amounts in thousands,
except per share amounts)
<S> <C> <C>
Total revenue, as previously reported........ $ 266,877 $ 196,780
Retroactive effect of pooling accounting..... 6,844 19,079
Reclassifications............................ 13,905 12,872
------------ ------------
Total revenue, as amended.................... $ 287,626 $ 228,731
============ ============
Gross profit, as previously reported......... $ 112,555 $ 81,658
Retroactive effect of pooling accounting..... 896 1,929
Reclassifications............................ -- --
------------ ------------
Gross profit, as amended..................... $ 113,451 $ 83,587
============ ============
Operating income, as previously reported..... $ 38,884 $ 26,195
Retroactive effect of pooling accounting..... (304) 501
------------ ------------
Operating income, as amended................. $ 38,580 $ 26,696
============ ============
Net income, as previously reported........... $ 16,123 $ 18,419
Retroactive effect of pooling accounting..... (542) 245
------------ ------------
Net income, as amended....................... $ 15,581 $ 18,664
============ ============
Earnings per diluted share as previously
reported.................................... $ 0.43 $ 0.57
Retroactive effect of pooling accounting..... (0.02) (0.02)
------------ ------------
Earnings per diluted share, as amended....... $ 0.41 $ 0.55
============ ============
Dilutive shares as previously reported....... 37,179 32,288
Retroactive effect of pooling accounting..... 528 1,510
------------ ------------
Dilutive shares, as amended.................. 37,707 33,798
============ ============
</TABLE>
4. BUSINESS COMBINATIONS
On July 31, 1997, the Company issued 3.2 million shares of common stock for
substantially all the outstanding common stock of Resource Management
International, Inc. (RMI). In connection with the acquisition of RMI, the
Company acquired assets and assumed liabilities with book values of $13.9
million and $11.1 million, respectively. On August 15, 1997, the Company
issued 0.8 million shares of common stock for substantially all of the
outstanding common stock of Reed Consulting Group, Inc. (Reed). In connection
with the acquisition of Reed, the Company acquired assets and assumed
liabilities with book values of $2.5 million and $2.5 million, respectively.
Additionally, the Company completed the acquisition of all of the common stock
of L.E. Burgess Consultants, Inc. (Burgess) as of January 1, 1997 and Sterling
Consulting Group, Inc. (Sterling) and Reed-Stowe & Co., Inc. (RSC), as of
December 1, 1997. In the aggregate for the Burgess, Sterling and RSC
transactions, the Company issued 0.7 million shares of common stock. In
connection with the acquisitions of Burgess, Sterling and RSC, the Company
acquired assets and assumed liabilities with book values of $0.6 million and
$0.9 million, respectively. All of the 1997 transactions were accounted for as
poolings of interests. There
F-10
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
were no pre-acquisition intercompany transactions or investments among the
Company, RMI, Reed, Burgess, Sterling, and RSC. The Company's consolidated
financial statements have been restated as if RMI, Reed, Sterling and RSC had
been combined for all periods presented. The Company's consolidated statement
of operations for the year ended December 31, 1997 includes revenues and net
income from RMI, Reed, Sterling and RSC totaling $35.3 million and $1.5
million, respectively, through the dates of acquisition. The stockholders'
equity and the operations of Burgess were not significant in relation to those
of the Company. As such, the Company recorded the Burgess transaction by
restating stockholders' equity as of the date of the acquisition without
restating prior period financial statements.
On August 19, 1998, the Company issued 7.3 million shares of common stock
for substantially all the outstanding common stock of LECG. In connection with
the acquisition of LECG, the Company acquired assets and assumed liabilities
with book values of $49.8 million and $17.4 million, respectively. On August
31, 1998, the Company issued 5.6 million shares of common stock for
substantially all of the outstanding common stock of Peterson. In connection
with the acquisition of Peterson, the Company acquired assets and assumed
liabilities with book values of $34.8 million and $24.7 million, respectively.
Additionally, the Company completed the acquisitions all of the common stock
of American Corporate Resources, Inc. (ACR), AUC Management Consultants, Inc.
(AUC), and Hydrologic Consultants, Inc. of California (HCI) as of April 3,
1998; The Vision Trust Marketing Group, LLC (VTM) as of June 1, 1998; and
Saraswati Systems Corporation (SSC) and Applied Health Outcomes, Inc. (AHO) as
of September 1, 1998. In the aggregate for the ACR, AUC, HCI, VTM, SSC, and
AHO transactions, the Company issued 1.2 million shares of common stock. In
connection with the acquisitions of ACR, AUC, HCI, VTM, SSC, and AHO, the
Company acquired assets and assumed liabilities with book values of $1.9
million and $1.4 million, respectively. All of the 1998 transactions were
accounted for as poolings of interests. The Company's consolidated financial
statements have been restated as if LECG, Peterson, AUC, HCI, SSC, and AHO had
been combined for all periods presented. The Company's consolidated statement
of operations for the year ended December 31, 1998 and 1997 includes revenues
totaling $104.8 million and $125.7 million, respectively, and net income
totaling $5.5 million and $9.0 million, respectively, from LECG, Peterson,
AUC, HCI, SSC, and AHO, through the dates of acquisition. The stockholders'
equity and the operations of ACR and VTM were not significant in relation to
those of the Company. As such, the Company recorded the ACR and VTM
transactions by restating stockholders' equity as of the date of the
acquisition without restating prior period financial statements.
The Company incurred significant costs and expenses in connection with
these acquisitions, including legal and accounting, and other various
expenses. These costs and expenses were recorded in the consolidated
statements of operations during the third quarter in each of the years 1998
and 1997.
During 1999, the Company completed eleven acquisitions (collectively, the
"1999 Acquisitions") in exchange for Company stock and cash having an
aggregate value of $235.7 million. On February 7, 1999, the Company issued 2.4
million shares of common stock (valued at the time of closing at approximately
$123.7 million) for substantially all of the outstanding common stock of
Strategic Decisions Group, Inc. and acquired the remaining minority interest
in exchange for $13.3 million in cash. On March 31, 1999, the Company
completed the acquisitions of all of the outstanding stock of Triad
International, Inc., GeoData Solutions, Inc., and Dowling Associates, Inc. in
exchange for 1.8 million shares of the Company's common stock (valued at the
time of closing at approximately $57.3 million). On September 30, 1999, the
Company completed its acquisition of the business operations and certain
assets of Penta Advisory Services LLC (Penta) and the stock of Scope
International, Inc. (Scope) for a total cash purchase price of $15.1 million.
The purchase agreements for Penta and Scope also provide for additional
payments, payable in cash or Company common stock, over the next two to five
years contingent on future revenue growth and gross margin targets. The
additional payments, if any, will be accounted for as additional goodwill. On
October 1, 1999, the Company completed the acquisition of the stock of Brooks
International AB, Brooks International Consulting OY, and Brooks International
SPRL for an
F-11
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
aggregate cash purchase price of $3.3 million. On November 1, 1999, the
Company completed the acquisition of the stock of The Barrington Consulting
Group, Inc. (Barrington) in exchange for $14.4 million in cash paid at closing
and total deferred cash payments of $7.8 million, payable in two equal annual
installments. The liability related to the deferred cash payments is reflected
in the consolidated balance sheet as of December 31, 1999 as $3.9 million of
other current liabilities and $3.9 million of other non-current liabilities.
The purchase agreement for Barrington also provides for additional cash
payments of up to $7.7 million in the aggregate, which are contingent on
continued employment by the Company of certain Barrington shareholders and are
payable in cash in two annual installments. The contingent payments will be
charged to expense ratably over the period of employment. On December 1, 1999,
the Company completed the acquisition of all of the assets of Glaze Creek
Partners, LLC in exchange for $0.8 million in cash. There were no pre-
acquisition intercompany transactions between the Company and the 1999
Acquisitions.
The 1999 Acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the results of operations have been included in
the accompanying consolidated financial statements from the date of
acquisition. Certain assets acquired of $46.2 million and liabilities assumed
of $36.9 million have been recorded at their estimated fair values. The excess
of cost over the net assets acquired of approximately $226.4 million has been
recorded as intangible assets, including goodwill. The allocation of the
excess cost over the net assets acquired to identifiable intangible assets and
goodwill was based upon independent appraisals, as were the estimated useful
lives. The estimated lives range from between one and 20 years, and
approximate, on a straight-line basis, an average life of 7 years.
The following unaudited pro forma financial information presents the
combined results of operations as if the 1999 Acquisitions had occurred as of
January 1, 1998, after giving effect to certain adjustments. The adjustments
include the amortization of goodwill and other intangibles, a reduction in
interest income and related income tax effects, and an increase in the
weighted average common shares outstanding. The pro forma information is for
informational purposes only. The information presented does not necessarily
reflect the results of operations that would have occurred had the
acquisitions been completed as of January 1, 1998, nor are they indicative of
future results.
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Revenue, in thousands................................ $437,095 $402,664
Net loss, in thousands............................... (23,600) (17,995)
Net loss per diluted share........................... $ (0.52) $ (0.44)
</TABLE>
5. STOCKHOLDERS' EQUITY
Initial Public Offering
On December 18, 1997, LECG completed an initial public offering, resulting
in net proceeds of approximately $24.4 million, net of issuance costs.
Secondary Public Offering
On March 2, 1998, the Company completed a secondary offering of its common
stock in which an additional 1.5 million shares were sold by the Company,
resulting in net proceeds of approximately $36 million. On November 19, 1998,
the Company completed a secondary offering of its common stock in which an
additional 1.5 million shares were sold by the Company, resulting in net
proceeds of approximately $51 million.
F-12
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employee Stock Purchase Plan
During 1996, the Company implemented a plan which permits employees to
purchase shares of the Company's common stock each quarter at 85% of the
market value. The market value for this purpose is determined to be the lower
of the closing market price on the first and last day of each calendar
quarter. There are 450,000 shares authorized for issuance under the plan. The
Company had issued 159,000 shares under the plan through December 31, 1999. As
of December 31, 1999, the Company held $0.8 million of withholdings from
employees which were used to purchase approximately 84,000 additional shares
under the plan in January 2000.
Treasury Stock Repurchases
On August 9, 1999, the Company announced that the Board of Directors had
authorized the repurchase of up to 3.0 million shares of the Company's common
stock in open market or in privately negotiated transactions. In August and
September of 1999, the Company repurchased a total of 0.5 million shares for
$18.9 million in privately negotiated transactions. In November 1999, the
Company repurchased 1.0 million shares for $20.8 million in open market
transactions. Also in November 1999, the Company accepted 0.6 million shares
with a then market value of $12.9 million as payment for the principal amount
of certain notes plus accrued interest related to borrowings by Mr. Maher, the
Company's Chairman and Chief Executive Officer at that time. See also Note 17,
"Related Party Transactions".
Shareholder Notes Receivable
At December 31, 1999, the Company held notes receivable from three former
Company officers with an aggregate principal balance of $7.9 million. See also
Note 17, "Related Party Transactions". The notes receivable arose from
transactions whereby these individuals borrowed money from the Company to
purchase a total of 200,000 shares of the Company's common stock from third
parties and 37,500 shares of common stock from the Company. The notes
receivable are shown on the balance sheet as a reduction in stockholders'
equity. The notes receivable were accompanied by pledge agreements which
pledge the shares as collateral security for repayment of the notes, which
shares are currently held by the Company. At the closing market price for the
Company's common stock on December 31, 1999 of $10 7/8 per share, the value of
the shares held as collateral for the notes receivable was approximately $2.6
million. Although the notes receivable are full recourse, are not due until
the year 2002 and there has been no event of default, the Company is not
certain that it will be able to collect the full amount due. In March 2000,
the borrowers have either challenged the enforceability or declined to confirm
their intention to comply with the terms of the notes and each have refused to
provide the Company with personal financial information that would support
their ability to pay the full amounts due. The Company has accrued a loss
contingency at December 31, 1999 in the amount of $5.3 million, representing
the difference between the principal amount of the notes receivable and the
value of the shares held by the Company as collateral. The $5.3 million was
included as a non-operating charge within other expense in the consolidated
statement of operations. The Company intends to take all appropriate steps to
enforce the notes in accordance with their terms.
Shareholder Rights Plan
On December 15, 1999, the Company's Board of Directors adopted a
Shareholders Rights Plan (the "Rights Plan") and declared a dividend
distribution of one Right (a "Right") for each outstanding share of common
stock, to stockholders of record at the close of business on December 27,
1999. Each Right will entitle its holder, under certain circumstances
described in the Rights Agreement, to purchase from the Company one one-
thousandth of a share of its Series A Junior Participating Preferred Stock,
$.001 par value (the "Series A Preferred Stock"), at an exercise price of $75
per Right, subject to adjustment. The description and terms of the Rights are
set forth in a Rights Agreement (the "Rights Agreement") between the Company
and American Stock Transfer & Trust Company, as Rights Agent.
F-13
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Until the Distribution Date under the Rights Agreement, the surrender for
transfer of any shares of common stock outstanding will also constitute the
transfer of the Rights associated with such shares. The Rights are not
exercisable until the Distribution Date and will expire at the close of
business on December 15, 2009, unless earlier redeemed or exchanged by the
Company. The Company may redeem the Rights in whole, but not in part, at a
price of $.01 per Right (subject to adjustment and payable in cash, common
stock or other consideration deemed appropriate by the Company's Board of
Directors) at any time until ten days following the Stock Acquisition Date
under the Rights Agreement. Immediately upon the action of the Company's Board
of Directors authorizing any redemption, the Rights will terminate and the
only right of the holders of Rights will be to receive the redemption price.
Until a Right is exercised, its holder, as such, will have no rights as a
stockholder of the Company, including, without limitation, the right to vote
or to receive dividends.
6. ACCOUNTS RECEIVABLE
The components of accounts receivable as of December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- -------
(in thousands)
<S> <C> <C>
Billed amounts ........................................ $ 86,849 $60,730
Engagements in process................................. 45,581 27,559
Allowance for uncollectible accounts................... (16,330) (8,126)
-------- -------
$116,100 $80,163
======== =======
</TABLE>
Engagements in process represent balances accrued by the Company for
services that have been performed but have not been billed to the customer.
Billings are generally done on a monthly basis for the prior month's services.
7. PROPERTY AND EQUIPMENT
Property and equipment, at cost, as of December 31 consisted of:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
Land and buildings.................................... $ 3,421 $ 2,878
Furniture, fixtures and equipment..................... 40,444 27,877
Software.............................................. 10,241 5,338
Leasehold improvements................................ 5,714 4,736
--------- ---------
59,820 40,829
Less: accumulated depreciation and amortization....... (26,057) (18,632)
--------- ---------
$ 33,763 $ 22,197
========= =========
</TABLE>
In December 1999, the Company made a decision to dispose of its corporate
headquarters land and building and is actively seeking a buyer. At such time,
the Company re-evaluated the carrying amount of the asset and estimated the
net realizable value through an independent appraisal. The Company has
recorded additional depreciation expense of $1.1 million to reflect the
impairment in value.
Based upon a comprehensive review of the Company's long-lived assets, the
Company recorded a non-cash charge to depreciation expense of $3.8 million in
1999. This charge reflects the write-down of a portion of the recorded asset
values of certain computer equipment and software. No additional assets were
deemed to be impaired.
F-14
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. INTANGIBLE ASSETS
The excess of the cost of the 1999 Acquisitions over the net assets
acquired of approximately $226.4 million has been recorded as intangible
assets, including goodwill, and is being amortized over the estimated useful
lives. The allocation of the excess of the cost over the net assets acquired
to identifiable intangible assets and goodwill was based upon independent
appraisals, as were the related estimated useful lives. Goodwill and other
intangible assets consisted of the following as of December 31, 1999: (in
thousands)
<TABLE>
<S> <C>
Goodwill........................................................ $ 96,906
Less--accumulated amortization.................................. (10,401)
--------
Goodwill, net................................................. 86,505
--------
Customer lists.................................................. 49,565
Employee workforce.............................................. 33,455
Non-compete agreements.......................................... 25,570
Other........................................................... 20,900
--------
Intangible assets............................................. 129,490
Less: accumulated amortization.................................. (13,899)
--------
Intangible assets, net........................................ 115,591
--------
Goodwill and intangible assets, net........................... $202,096
========
</TABLE>
The Company periodically examines the carrying value of its goodwill and
other intangible assets to determine whether there are any impairment losses.
If indicators of impairment were present, and future cash flows were not
expected to be sufficient to recover the assets' carrying amount, an
impairment loss would be charged to expense in the period identified. No event
has been identified that would indicate an impairment of the value of the
goodwill and other intangible assets as of December 31, 1999.
9. SHORT-TERM AND LONG-TERM DEBT
The Company maintains a line of credit agreement in the amount of $50.0
million which expires May 31, 2001. Under the agreement, the Company may
borrow a maximum amount of up to 80% of eligible accounts receivable. The
agreement contains certain covenants, the most restrictive of which require
the Company to maintain a minimum level of earnings before interest, taxes,
depreciation and amortization. The balance outstanding under the line of
credit was $10 million at December 31, 1999. At December 31, 1999, the Company
had letters of credit of $2.2 million outstanding. The letters of credit
expire at various dates through July 2003.
At December 31, 1998, the Company had no outstanding short-term debt. The
Company had no long-term debt outstanding as of December 31, 1999 or 1998.
10. MERGER-RELATED COSTS AND RESTRUCTURING CHARGES
The Company recognized $1.2 million of expense in 1999 for employee
separations associated with consolidation of certain accounting and human
resources functions. In July 1999, the Company announced a restructuring
initiative and offered involuntary severance packages to 73 employees in the
administrative, accounting and human resources functions. In 1998, the Company
incurred restructuring charges and merger-related costs of $12.8 million
related to the acquisitions of LECG and Peterson, which were accounted for as
poolings of interests. These costs included legal, accounting and other
transaction related fees and expenses, as well as accruals to consolidate
certain facilities. At December 31, 1999, the Company reviewed the merger-
related accruals and determined that certain amounts previously accrued were
no longer necessary given subsequent acquisition activity and changes in the
Company's organizational structure. The results of operations for 1999 reflect
a benefit of $1.4 million for the reversal of the previously accrued amounts.
In 1997, the Company incurred legal, accounting and other transaction related
fees and expenses of $1.3 million related to the acquisitions of RMI and Reed,
which were accounted for as poolings of interests. During 1999, the Company
increased the accrual for restructuring charges and merger-related costs by
$3.0 million related to the 1999
F-15
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Acquisitions, which were accounted for under the purchase method of
accounting. These costs were reflected as purchase price adjustments and, as
such, increased the amount of goodwill.
The restructuring charges and merger-related costs were determined based on
formal plans approved by the Company's management using the best information
available at the time. The amounts the Company may ultimately incur may change
as the balance of the Company's initiative to integrate acquired companies is
executed. The activity affecting the accrual for restructuring charges and
merger-related costs during 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Direct
Transaction Facilities Workforce Other
Costs Closings Reductions Costs Total
----------- ---------- ---------- ------- -------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1997
Charges to operations. $ 706 $ -- $ 330 $ 276 $ 1,312
Utilized.............. (706) -- (330) (276) (1,312)
Year ended December 31,
1998 7,638 3,600 -- 1,540 12,778
Charges to operations.
Utilized.............. (4,434) (239) -- (1,655) (6,328)
Year ended December 31,
1999 -- -- 1,160 -- 1,160
Charges to operations.
Purchase price
adjustments.......... 2,425 350 255 -- 3,030
Utilized.............. (4,803) (232) (879) -- (5,914)
Changes in estimates.. (826) (655) -- 115 (1,366)
------- ------ ------ ------- -------
Balance at December 31,
1999................... $ -- $2,824 $ 536 $ -- $ 3,360
======= ====== ====== ======= =======
</TABLE>
11. LEASE COMMITMENTS
The Company leases its office facilities and certain equipment under
operating lease arrangements which expire at various dates through 2012. The
Company leases office facilities under noncancelable operating leases which
include fixed or minimum payments plus, in some cases, scheduled base rent
increases over the term of the lease and additional rents based on the
Consumer Price Index. Certain leases provide for monthly payments of real
estate taxes, insurance and other operating expenses applicable to the
property. In addition, the Company leases equipment under noncancelable
operating leases.
Future minimum annual lease payments, for the years subsequent to 1999 and
in the aggregate, are as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
------------------------ --------------
(in thousands)
<S> <C>
2000...................... $ 15,241
2001...................... 16,312
2002...................... 13,965
2003...................... 11,539
2004...................... 8,710
Thereafter................ 39,439
--------
$105,206
========
</TABLE>
Rent expense for operating leases entered into by the Company and charged
to operations amounted to $15.8 million for 1999, $10.0 million for 1998, and
$9.8 million for 1997.
F-16
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. INCOME TAX EXPENSE
Income tax expense consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998 1997
------- ------- ------
(in thousands)
<S> <C> <C> <C>
Federal:
Current....................................... $14,186 $20,180 $5,264
Deferred...................................... (7,391) 1,600 2,648
------- ------- ------
Total....................................... 6,795 21,780 7,912
------- ------- ------
State:
Current....................................... 3,272 3,461 1,392
Deferred...................................... (1,716) 396 (67)
------- ------- ------
Total....................................... 1,556 3,857 1,325
------- ------- ------
Foreign......................................... 476 -- --
------- ------- ------
Total federal, state and foreign income tax
expense.................................... $ 8,827 $25,637 $9,237
======= ======= ======
</TABLE>
Income tax expense differs from the amounts estimated by applying the
statutory income tax rates to income before income tax expense as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998 1997
------ ---- ----
<S> <C> <C> <C>
Federal tax at statutory rate....................... 35.0% 35.0% 35.0%
State tax at statutory rate, net of federal tax
benefits........................................... (17.8) 7.3 4.6
Foreign taxes....................................... (8.2) -- --
Effect of nontaxable interest and dividends......... 12.5 (1.7) (0.9)
Effect of nontaxable entity status.................. -- -- (5.2)
Effect of non-deductible merger-related costs....... (1.0) 4.0 --
Effect of non-deductible amortization............... (139.2) -- --
Effect of non-deductible stock compensation expense. (23.3) -- --
Effect of conversion from cash to accrual method of
accounting for acquired company.................... -- 14.7 --
Effect of other non-deductible expenses............. (10.4) 2.9 (0.4)
------ ---- ----
(152.4)% 62.2% 33.1%
====== ==== ====
</TABLE>
The tax benefits associated with nonqualified stock options and
disqualifying dispositions of incentive stock options reduced taxes payable by
$4.9 million in 1999 and $3.3 million in 1998. Such benefits were recorded as
an increase to additional paid-in capital in each year.
F-17
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes result from temporary differences between years in
the recognition of certain expense items for income tax and financial
reporting purposes. The source and income tax effect of these differences are
as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------ -------
(in thousands)
<S> <C> <C>
Deferred tax assets:
State income taxes.................................... $ (121) $ 479
Allowance for uncollectible receivables............... 4,379 194
Merger-related costs.................................. -- 1,427
Stockholders' notes................................... 2,239 --
Insurance related costs............................... 865 --
Other................................................. 202 315
------ -------
Total deferred tax assets........................... 7,564 2,415
Deferred tax liabilities:
Adjustment resulting from changes in the method of
accounting used for tax purposes..................... 6,435 9,136
Other................................................. (531) 726
------ -------
Deferred tax liabilities................................ 5,904 9,862
------ -------
Net deferred tax assets (liabilities)................... $1,660 $(7,447)
====== =======
</TABLE>
The Company has not recorded a valuation allowance as it believes it is
more likely than not that the net deferred tax asset is recoverable.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Total interest paid during the years ended December 31, 1999, 1998 and 1997
were $0.4 million, $0.7 million, and $0.3 million, respectively. Total income
taxes paid during the years ended December 31, 1999, 1998 and 1997 were $27.6
million, $17.7 million, and $3.5 million, respectively.
During the first quarter of 1999, the Company issued 4.2 million shares of
common stock (valued at the time at approximately $181.0 million) for
substantially all of the outstanding common stock of four companies acquired
in transactions accounted for by the purchase method of accounting. In
addition to the $42.1 million of cash used to acquire certain businesses
during 1999, the Company entered into commitments for deferred cash payments
of $7.8 million, payable in two equal annual installments. See also Note 4,
"Business Combinations".
In April 1999, certain of the Company's then officers borrowed $3.5 million
from the Company to exercise certain then-vested options. In November 1999,
the Company received 605,684 shares of the Company's common stock, with a then
market value of $12.9 million, in lieu of cash as payment for the principal
amount of certain loans plus accrued interest. See also Note 17, "Related
Party Transactions".
14. LONG-TERM INCENTIVE PLAN
On June 30, 1996, the Company adopted a Long-Term Incentive Plan which
provides for common stock, common stock-based, and other performance
incentives to employees, consultants, directors, advisors, and independent
contractors of the Company. The Long-Term Incentive Plan, as amended, was re-
approved by a vote of the Company's shareholders in July 1999. As of December
31, 1999, the Company had 8.2 million options outstanding at a weighted
average exercise price of $29.15 per share. As of December 31, 1999, 0.7
million options were exercisable.
F-18
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In general, options issued under the Long Term Incentive Plan were issued
at the fair market value at the dates of grant, have a ten-year term and
become vested and thus exercisable in annual installments over a four year
period following the date of grant. However, the plan permits the Compensation
Committee, or the chief executive officer as its delegate, to vary such terms
and conditions, including granting nonqualified options at prices below fair
market value at the date of grant. The Company has determined, based in part
on the absence of contemporaneous documentation, that 0.3 million nonqualified
options issued to a total of sixteen individuals were issued at prices below
fair market value. Accordingly, the Company has recorded an expense in 1999 of
$3.5 million for stock option compensation expense attributable to such
options. The amount charged to expense represents the aggregate dollar amount
by which the grant prices of the options differ from the market prices as of
the dates for which the Company has independent evidence to support the
issuance of the options. The amount charged to expense has been amortized over
the relevant vesting periods. See also Note 17, "Related Party Transactions."
The Company applies APB Opinion 25, Accounting for Stock Issued to
employees, and related Interpretations in accounting for its plan.
Accordingly, no compensation cost has been recognized for those option grants
where the exercise price is equal to the fair market value at the date of
grant. Had compensation cost for the plan been determined based on the fair
value at the grant dates for awards under the plan consistent with the method
of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's
compensation expense for the years ended December 31, 1999, 1998 and 1997
would have been increased by $18.3 million, $4.6 million, and $1.1 million,
respectively, net of related income taxes. As a result, the Company's pro
forma net earnings available to common stockholders and earnings per common
and common equivalent shares would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
(in thousands, except per
share amounts)
<S> <C> <C> <C>
Earnings, as reported:
Net income (loss) ........................ $ (14,622) $ 15,581 $ 18,664
Net income (loss) per basic share......... $ (0.35) $ 0.43 $ 0.56
Net income (loss) per dilutive share...... $ (0.35) $ 0.41 $ 0.55
Earnings, fair value method:
Net income (loss), with compensation
expense from fair value options.......... $(32,941) $ 10,990 $ 17,526
Fair value method net income (loss) per
basic share.............................. $ (0.79) $ 0.30 $ 0.53
Fair value method net income (loss) per
dilutive share........................... $ (0.79) $ 0.29 $ 0.52
</TABLE>
The weighted average fair value of options granted in 1999, 1998 and 1997
was $12.04, $5.68, and $4.46, respectively. For purposes of calculating
compensation cost under SFAS No. 123, the fair value of each option grant is
estimated as of the date of grant using the Black-Scholes option pricing
model. The following weighted average assumptions were used in the model for
grants made in 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected volatility..................................... 75% 45% 45%
Risk free interest rate................................. 5.5% 5.0% 5.7%
Dividend yield.......................................... 0% 0% 0%
Contractual or Expected lives (years)................... 8.5 2.8 2.5
</TABLE>
F-19
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additional information on the shares subject to options is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ----------------- -----------------
Number Weighted- Number Weighted- Number Weighted-
of Average of Average of Average
Shares Exercise Shares Exercise Shares Exercise
(000's) Price (000's) Price (000's) Price
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year...... 5,510 $24.19 2,623 $16.53 689 $10.37
Granted................. 4,481 32.68 3,849 28.47 2,173 18.35
Exercised............... (696) 17.98 (361) 13.07 (3) 8.00
Forfeited............... (1,082) 25.24 (601) 24.90 (236) 16.35
------ ------ ----- ------ ----- ------
Options outstanding at
end of year............ 8,213 $29.15 5,510 $24.19 2,623 $16.53
====== ===== =====
Options exercisable at
year end............... 676 $19.31 138 $14.41 14 $18.45
====== ===== =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Weighted-Average Weighted-Average
-------------------------- --------------------------
Shares Exercise Remaining Shares Exercise Remaining
Range of Exercise Price (000's) Price Life (000's) Price Life
----------------------- ------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 0 to $15.............. 790 $12.17 4.6 1,025 $12.46 0.7 years
$16 to $25.............. 737 21.23 6.0 1,277 20.99 2.5 years
$26 to $35.............. 5,656 29.03 8.8 3,174 29.06 3.6 years
$36 to $45.............. 307 43.71 9.5 34 39.30 3.8 years
$46 to $55.............. 723 50.53 9.1 -- -- --
----- -----
8,213 $29.15 8.2 5,510 $24.19 2.8 years
===== =====
</TABLE>
15. EMPLOYEE BENEFIT PLANS
The Company maintained profit sharing and savings plans for several
operating subsidiaries through December 31, 1999. Eligible employees may
contribute a portion of their compensation to their respective operating
subsidiary's plan. The Company matches a percentage of employees' current
contributions on some operating subsidiaries' plans and has discretion to
match contributions on other plans. The Company may also make an annual profit
sharing contribution at its discretion. The Company, as sponsor of the plans,
uses independent third parties to provide administrative services to the
plans. The Company has the right to terminate the plans at any time. The
Company contributions to the various plans which were charged to operations
were $1.9 million, $1.0 million, and $1.0 million in the years ended December
31, 1999, 1998, and 1997, respectively.
Effective February 2000, the Company amended the profit sharing and savings
plans of all operating subsidiaries to provide an employer matching
contribution for all participants in an amount equal to 100% of the employees'
current contributions, up to a maximum of 3% of the employees' total eligible
compensation.
16. SEGMENT INFORMATION
The Company has applied the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. This statement establishes
standards for reporting information regarding operating segments, products and
services, geographic areas and major customers. The Company's operations
represent a
F-20
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
single reportable segment under the provisions of SFAS No. 131. The Company's
operations have a high degree of similarity in their economic and operational
characteristics, including the nature of the services provided, the type or
class of customers for those services, and the methods used for delivering
such services. While the Company has retained certain brand identities
associated with its principal operating subsidiaries, these distinctions have
not been a critical factor for management in making operating decisions or in
assessing performance. In addition, the structure of the Company's internal
organization has changed from time to time as a result of acquisition activity
and in response to customer, project, personnel or geographic requirements
and, as such, discrete financial information is not available on a consistent
basis at the operating subsidiary level.
The Company derives substantially all of its revenues from operations in
the United States. In each of the three years ended December 31, 1999, more
than 95% of the Company's consolidated revenues and operating income were
derived from domestic operations. Substantially all of the Company's
identifiable assets are located in the United States.
17. RELATED PARTY TRANSACTIONS
In April 1999, Mr. Maher, the Company's Chairman and Chief Executive
Officer at that time, borrowed $2.7 million from the Company so that he could
exercise his then-vested options. Mr. Maher exercised all 112,500 of his then-
vested options at an exercise price of $24.00 per share. In August 1999, Mr.
Maher borrowed an additional $10 million from the Company. The applicable
interest rate for this loan was 5.75%, payable annually. In November 1999, the
Company received from Mr. Maher 605,684 shares of the Company's common stock
with a then market value of $12.9 million as payment for the principal amount
of the loans plus accrued interest.
Five non-employees related by blood or marriage to Mr. Maher received stock
option grants. Mr. Maher has informed the Company that each of these persons
provided services to the Company from time to time and received no other
compensation for those services. In addition, one other individual not
employed by the Company, but who was an employee of an unrelated company owned
or controlled by Mr. Maher, received stock option grants. Mr. Maher has
informed the Company that this individual provided certain services to the
Company from time to time. These persons are among sixteen as to whom the
Company has determined that their options were issued at prices below fair
market value. See also Note 14, "Long Term Incentive Plan". The Company has
recorded an expense in 1999 of $3.5 million for stock option compensation
expense attributable to such options issued to the sixteen individuals. Of the
total stock option compensation expense of $3.5 million, $0.6 million is
attributable to the six persons described above.
In April 1999, Mr. Cain and Mr. Demirjian, respectively the Company's Chief
Administrative Officer and the Company's General Counsel at that time, each
borrowed $425,063 from the Company to exercise all 18,750 of their then-vested
options at an exercise price of $22.67 per share. The notes which evidence
these borrowings are full recourse, are due on or before the third anniversary
date and bear interest at a rate equal to 5.75%, payable annually. The notes
were accompanied by pledge agreements which pledge the exercised option shares
as collateral security for repayment of the notes, which shares are currently
held by the Company.
In late August, Mr. Cain, Mr. Demirjian and Mr. Kingsbury (the Company's
Chief Financial Officer at that time) borrowed $2.625 million, $2.625 million
and $1.75 million, respectively, from the Company, related to their purchases
of 75,000, 75,000 and 50,000 shares, respectively, of the Company's common
stock from third parties at $35 per share. The notes which evidence these
borrowings are full recourse, are due on or before the third anniversary date
and bear interest at a rate equal to 5.75%, payable annually. These notes were
accompanied by pledge agreements which pledge the shares as collateral
security for repayment of the notes, which shares are currently held by the
Company.
F-21
<PAGE>
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result of recent developments, the Company has accrued a loss
contingency at December 31, 1999 in the amount of $5.3 million, related to the
notes receivable from Mssrs. Cain, Demirjian and Kingsbury. See also Note 5,
"Stockholders Equity". The Company has discontinued the accrual of interest on
these notes.
In November 1999, the Company entered into an agreement with Mr. Maher,
pursuant to which, among other things, Mr. Maher agreed to provide certain
consulting services to the Company over a two year period, including providing
information about past transactions or other matters as to which he may be
familiar, and the Company agreed to pay Mr. Maher twenty-four monthly payments
of $25,000.
18. LITIGATION
Numerous purported class action lawsuits have been filed against the
Company since November 1999 in the United States District Court for the
Northern District of Illinois. These actions name as defendants the Company
and certain former directors and former executive officers (one of whom,
however, remains an employee of the Company) of the Company and are purported
to be on behalf of persons who purchased shares of the Company's common stock
during various periods through November 1999. The complaints allege various
violations of federal securities law, including violations of Section 10(b) of
the Securities Exchange Act of 1934, and that the defendants made materially
misleading statements and/or material omissions which artificially inflated
prices for the Company's common stock. The plaintiffs seek a judgement
awarding damages and other relief. The Company believes it has meritorious
defenses and intends to vigorously defend these actions. The outcome of these
lawsuits cannot be predicted with certainty and a material adverse judgment
against the Company could have a material adverse effect on the Company.
Navigant International, Inc., a national travel agency headquartered in
Denver, Colorado, sued the Company in July 1999 in the United States District
Court for the District of Colorado claiming that the use of "Navigant" in our
name infringes on their use of and rights in such name. The complaint seeks
declaratory relief and an injunction against our use of "Navigant," attorneys'
fees and other related relief. The Company believes it has meritorious
defenses and intends to vigorously defend this action.
In addition, from time to time, we are party to various other lawsuits and
claims in the ordinary course of business. While the outcome of those lawsuits
or claims cannot be predicted with certainty, we do not believe that any of
those lawsuits or claims will have a material adverse effect on the Company.
F-22
